A key element of the Romanian government's agreement with the International Monetary Fund, which introduced a salary cap for employees in state-run companies, has been declared illegal by the Bucharest appeal court.

The decision represents a setback for the country's plans to rejuvenate its economy with the help of IMF funds. Last week, the IMF approved, after a number of delays, the extension of a $535m standby credit and the immediate release of $116m. This approval was expected to trigger further funds from the World Bank and the European Union.

However, the release of the funds was only sanctioned after firm commitments from the country's centre-right coalition government that state spending would be reduced, with salaries pegged and performance-related. Previously, managers at state-run industries could award themselves and their employees bonuses despite incurring huge losses and mounting arrears. It is not unusual for large state enterprises in Romania to owe considerable sums to state utilities and have large outstanding tax bills.

The court ruling followed a complaint from the Meridian Trade Union and an announcement by other unions that they would be initiating strikes and protests. It is likely to add to the problems of the government, which is unpopular in opinion polls, and which may lose power after parliamentary and presidential elections in the autumn. The former communist Social Democrat party (PDSR) gained crucial seats in recent local elections.

The forthcoming election was one of the main reasons the IMF had delayed granting the standby credit. Successive governments have promised austerity, only to cave in to electoral pressures. Cracks in the previously firm commitments from the government to the current IMF deal have already started to emerge. The trade and industry minister has disowned the law on state company salaries passed by the cabinet two weeks ago. Radu Berceanu, of the Democratic party, told the Romanian newspaper, Curentul, he was opposed to the new regulations. "The ordinance was signed in a hurry by some secretaries of state because [Prime Minister Mugur] Isarescu was leaving for the IMF meeting," he said.